Is Honda Really a Buy?

Given all of the drama in the auto business in recent years, it's been easy to overlook Honda (NYSE: HMC  ) . After all, it hasn't had the epic global growth (or epic recall drama) of Toyota (NYSE: TM  ) , nor a dramatic near-death-and-rebirth story like Ford (NYSE: F  ) .

Instead, Japan's No. 2 automaker has been cruising along, continuing to pay a modest dividend to shareholders despite the global economic crunch, and continuing to keep its loyal customers happy with great products.

Or has it?

The part about the dividend is true enough -- though with a 0.9% dividend yield, I'd hardly call Honda a dividend champ -- but the rest?

CAPS players have given Honda's stock a five-star rating, but I think there's a case to be made that Honda's coasting on its past achievements. Given the competition, that's a bad plan.

It's not your father's Honda
Many of us formed our impressions of Honda's cars years ago. I'm no exception -- my dad bought his first Honda, an Accord, in late 1979. It was the first of three Hondas he'd own during the 1980s. None of them were speed demons, but the handling and build quality were miles beyond the Detroit products we were used to. And we weren't the only ones to notice: Honda's sales soared through the decade.

But now? For the most part, Hondas still do well in those all-important Consumer Reports reliability surveys. But they've got a lot more company in the top tiers of the magazine's comparison tests -- from Hyundai, Nissan, Subaru, Ford, and (believe it or not) even General Motors.

Hondas are still reliable, in other words, but that's not as much of an edge as it used to be -- everybody has upped their quality game. Sure, Honda still sells plenty of cars. But the innovative edge on which the company built its reputation seems to have disappeared. Review after review says much the same thing: Honda's cars are good, but not great. With a couple of shining exceptions, Honda seems to have gone from building great products that drive growth to building good-enough products that (mostly) keep loyal customers coming back.

The last automaker to try that strategy was General Motors, and we all know how well that worked out. Standing still -- even for Honda -- isn't good enough in today's ultra-competitive global marketplace.

Hey Honda, where's your electric car?
Electric vehicles are about to be huge -- but Honda seems to be missing in action. After years of talk, the EV space is about to heat up for real, with Ford and Nissan and General Motors joining hybrid kings Toyota on one side, and upstarts like Silicon Valley's Tesla Motors (Nasdaq: TSLA  ) and Berkshire Hathaway (NYSE: BRK-B  ) backed Chinese automaker BYD (OTC: BYDDY.PK) on the other. Honda, who should have absolutely ruled this space by now, instead looks like a Johnny-come-lately with what seem like hastily drawn-up plans to launch EVs... at some point.

Meanwhile, the company's hybrids -- another corner of the market that Old Honda would have owned -- look like also-rans in the shadow of Toyota and, increasingly, Ford. The company's new CR-Z hybrid is a tiny two-seater, just like its pioneering 49 mpg. Insight was back in 1999 -- but this one can't even match the Prius's fuel economy numbers, much less break 60 mpg on the highway like its predecessor.

Speaking of Honda's hybrids, while the company may not have Toyota-sized quality troubles, it's had surprisingly un-Honda ones. Consider the Civic Hybrid's batteries, which are developing a reputation for dying years ahead of schedule. Honda recently introduced a software "fix" for the problem, but owners contend that the fix lowers the car's mileage from around 45 mpg to a much more pedestrian figure in the low 30s.

Not good, especially when Toyota's hybrids -- and Ford's -- just seem to keep cruising along.

A spark of hope?
Every company has recalls and quality issues from time to time, of course. But there's more serious evidence that Honda's product development has gotten off track. The current Civic, in many ways the company's bread-and-butter model, is almost five years old. That's not exactly ancient -- except that Honda has for years replaced the Civic on a rigid four-year schedule, and apparently the most recent edition was sent back to the drawing board shortly before its planned launch.

Why? Honda isn't saying, of course. But ironically, it might be a good sign: As we all know, the first step to fixing a problem is to acknowledge that it exists. But I think I need to see more evidence of a product turnaround before we can call Honda's stock a buy.

True to its name, The Motley Fool is made up of a motley assortment of writers and analysts, each with a unique perspective; sometimes we agree, sometimes we disagree, but we all believe in the power of learning from each other through our Foolish community.

Fool contributor John Rosevear owns shares of Ford. Berkshire Hathaway is a Motley Fool Inside Value choice. BYD is a Motley Fool Rule Breakers selection. Berkshire Hathaway and Ford are Motley Fool Stock Advisor picks. The Fool owns shares of Berkshire Hathaway. Try any of our Foolish newsletter services free for 30 days. The Motley Fool has a disclosure policy.


Read/Post Comments (13) | Recommend This Article (11)

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On September 08, 2010, at 3:57 PM, BioBat wrote:

    Even though I recently purchased a Honda, would at least consider one for a new car, and know full well, they make reliable cars, I think I'd have to say no because they are coasting on their past success. What does it mean to drive a Honda these days? Reliability that's about it. Where's the style? Where's the drive to get better? To me, they're exactly what Toyota was about 1 year ago - arrogant to the point of potentially ignoring fatal flaws in their manufacturing or design. Arrogant to the point of driving away customers - I actually had one sneer at me a couple of years ago for considering going to Ford - needless to say I walked right out on him. Yes, Honda makes good cars but there's nothing to really differentiate them from another Asian competitor like Hyundai that has also been consistently making good cars over the past 5-10 years. Actually there is - the sticker price.

  • Report this Comment On September 08, 2010, at 4:22 PM, TMFMarlowe wrote:

    @BioBat: I think you nailed it. Thanks for reading.

    John Rosevear

  • Report this Comment On September 08, 2010, at 6:06 PM, JohnnyCobol wrote:

    We have had the battery fix for our 2006 Civic Hybrid. The dropoff so far has not been noticeable (41-42 mpg). We noticed more of a dropoff when we got new tires that turned out to have more rolling resistance than the old ones. We were averaging 45-46 prior to that.

  • Report this Comment On September 08, 2010, at 7:37 PM, FutureMonkey wrote:

    Even the best automaker is still facing single digit growth prospects. As an industry, automaking has huge fixed costs, high recurring capital expenditure requirements that eat away at retained profit, constant need to feed the voracious R&D appetite to maintain competitive advantage, and limited ability to pass cost pressures on to consumer (limited price power) due to intense price competition from crowded market place and heavy discounting by other companies. High capital costs and limited pricing power are two characteristics that make Buffetologists cringe. Add to that the fact that Honda could see its operating margin advantage dry up rapidly with volatitility in the yen-dollar exchange rates, and I start seeing redflags.

    That said, price to book and cashflow seem reasonable given todays price and todays cashflow. However with razor thin margins in the light vehichle business, 1% change in operating margin due to unexpected costs or poor sales could equal dramatic changes in apparent earnings and cash flows to investors and thus wild swings in traditional valuation ratios. Given the slug like speed that automakers respond to changing market conditions, I'm steering clear of the whole industry. Many other Blue Chips with healthy balance sheets, strong dividend payment, and less risk.

  • Report this Comment On September 09, 2010, at 8:26 AM, ivan11 wrote:

    I think I detect a bit of a Honda hater ;)

    for sure there have been some missteps (Insight most noteable)...but otherwise Honda is alive and (very) well...I have had my CRZ for 2 weeks now and the car is a blast to drive, gets MPG that easily exceed EPA numbers (epa testing did not allow use of "econ mode") and will no doubt exceed sales targets here as it did abroad...yes straight line acceleration is not superfast but acceleration, price, mileage is equal to base minicooper, which was their target (and I may be wrong but I think quite a few of those have been sold here!)...handling is where the CRZ shines :)

    how about minivans, a segment that is predicted to be coming back in the next few years. Check out this review of the new Odyssey - it will no doubt be the segment leader...

    http://www.insideline.com/honda/odyssey/2011/2011-honda-odys...

    new Civic also on the way...Accord just a refresh for now...

    so lets talk electrics - Honda took a wait and see attitude because it wasnt clear (and still isnt to some) that the electric market would succeed (same with Fuel Cells, where Honda has taken the lead, and natural gas cars which are available through Honda here in NY). Nissan took the lead with electrics, but realize they boast about the number of reservations for the Leaf - they only required a REFUNDABLE deposit, so lets see how many carry through on the purchase. (they are only offering 200 cars for intial delivery in December). Tesla, at this point, is a joke, although they did a reasonable job using a Lotus car as their base - lets see how they do with their own model from scratch. Personally I think the Volt approach where you have the gasoline engine to bail you out when you use all your electric power will be most practical here in the US (We are leaps and bounds behind France and other countries in setting up the infrastructure for electric cars). Make no mistake, Honda has realized they have gotten away from their roots a bit and are remedying that. If anyone can catch up in the electric market, they can...So I wouldnt write them off just yet ;)

  • Report this Comment On September 09, 2010, at 9:15 AM, TMFMarlowe wrote:

    @ivan11, I'm hardly a "Honda hater". I'm a former Honda fan who is disappointed with the company's current direction and who thinks it does not bode well for the business.

    You say, "Honda has realized they have gotten away from their roots a bit and are remedying that". What I'm saying is "maybe, maybe not -- show me the money" -- or in this case, the product. The Odyssey looks good, but the jury's still very much out.

    John Rosevear

  • Report this Comment On September 09, 2010, at 12:53 PM, ivan11 wrote:

    gotcha..

    I forgot to mention their first plug-in hybrid is about a year and a half away...whether it will be coming to the US initially I dont know....

    http://www.nzherald.co.nz/motor-vehicles/news/article.cfm?c_...

  • Report this Comment On September 11, 2010, at 6:01 PM, DavidTheJust wrote:

    I purchased my first Honda Civic about a year and a half ago. My wife has had an Accord for 5 years. Previously I drove a Camry (I've also owned GM and Ford products - so I am not simply a repeat customer for Honda).

    Frankly, I think you are wrong about Honda. I still remember test driving a bunch of cars before switching to the civic. The civic is a beautifully designed car. Everything is where it should be and works the way it should. It is a pleasure to drive. It is also a fundamentally different car than older civics (including the fact that it is much larger than the older civics).

    I also suspect that you are underestimating how highly many consumers value cars that last a long time. The car magazines often give rave reviews to "innovative" products. It would be more useful (although not a good business plan for the magazines) if they ran reviews of cars with 100k + miles on them. It is always risky to extrapolate from current conditions, but isn't it likely that the severe recession we are going through is going to encourage (on the margin) people to focus even more on the long term reliability of the car they are buying? My guess is that HMC will dramatically grow its U.S. market share over the next 5 years and that it may double its U.S. market share within 7 to 8 years.

    My assessment of the company may make the stock look very attractive - but it is not for me. I don't want to invest in any industry where governments refuse to let companies go bankrupt. Tax payer subsidies to the weaker players keeps capacity artificially high and depresses the industry's ability to achieve sustainably high returns on invested capital.

  • Report this Comment On September 13, 2010, at 4:59 PM, PulSamsara wrote:

    Honda is a relatively small company - competing in an increasingly transnational world. I would like to see a Honda Bombardier merger with a strong Renault/Nissan alliance. I could see this synergy working for many reasons in many markets.

  • Report this Comment On September 13, 2010, at 5:18 PM, TMFMarlowe wrote:

    @DavidTheJust: I put over 100k miles on all my cars. I've had a couple go much more -- including an '88 Prelude that was a hand-me-down from my dad a long time ago, that went over 250k before the roof (!) rusted through.

    I don't underestimate the longevity of Hondas. But I do think you are underestimating the extent to which the competition has caught up with them. "Everything is where it should be and works the way it should" is not a Honda-only distinction anymore, it's the minimum price of entry in a brutally competitive global market.

    @PulSamsara: Honda-Bombardier is an interesting idea. Lots of folks have talked about the possible synergies in a BMW-Honda merger. I think both of those companies are determined to stay independent until the bitter end, though.

    Thanks for reading.

    John Rosevear

  • Report this Comment On September 13, 2010, at 5:32 PM, jumbled wrote:

    In regards to Honda's current direction with electric vehicles: from what I can tell, Honda's plan is more forward-looking, in that it's developing technologies for fuel-cell powered vehicles as opposed to devoting a lot of research into conventional battery power. This includes plans for home power stations that process natural gas into hydrogen.

    This could potentially mean Honda will leapfrog the competition with hard to develop technologies and a full patent portfolio. Battery powered cars have a number of issues to overcome -- such as how a battery will survive a Minnesota winter -- issues that don't come up with fuel cells. By the time Nissan and Ford get all the kinks worked out, fuel cell cars may be ready to take on the market.

  • Report this Comment On November 18, 2010, at 6:04 PM, pgacek51 wrote:

    They need to come out with their flagship sports cars like the S2000 and the NSX again. It would help their brand image and I have no doubt they would be top sellers. Please Honda, take my advice. I need another S2000 and NSX. The originals were underpowered, but they were the best. The S2000's my daily driver with around 30-35 mpg highway and 25 mpg city. Plus, it's super duper fun!

  • Report this Comment On April 19, 2011, at 1:26 PM, davedallas wrote:

    i have bought and loved 7 hondas over the years and will likely buy a couple more before I die. I see no reason to buy anything else.

    as for EVs the writer is wrong. Pure EVs will never be "big" because of the weight and slow charge rate of the batteries. High efficiency internal combustion engines and hybrid setups are the solution for the foreseeable future.

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